timestamp: <%= Time.now.to_s %>
After only a bit of head scratching and thinking (it pays to think!), I figured out that it only takes xmlschema datetime formats. I don't remember it being the case, but yeah, that's what you have to do now...at least for Rails 1.2.0+. So now, it should look like this.
timestamp: <%= Time.now.xmlschema %>
Hope that saved you some time. Tip!